Provisions, contingent assets and contingent liabilities – IAS 37.pptVIP

Provisions, contingent assets and contingent liabilities – IAS 37 Week 5 MN20018 Off Balance Sheet Financing – Substance over Form Substance Has a transaction occurred Giving rise to a new asset or liability Giving rise to a change in an existing asset or liability Rights Access to benefits Evidenced by exposure to risks Likelihood of risks arising Substance over form Typical examples: Consignment stocks Sale and repurchase agreements Debt factoring Consignment stocks Legal title retained by consignor Consider economic risks and benefits Likelihood of stock being returned Past experience Contractual penalty clauses Sale and repurchase agreements Vendor retains control of the asset Asset remains in use Substance not that of normal sale Retain on balance sheet of vendor Sale and repurchase agreements Substance is that of finance arrangement Money borrowed on security of asset Repurchase amount will include interest Separate out the interest element Report interest in Income Statement Report as a liability in the balance sheet Debt factoring Factoring may be: Without recourse Or With recourse Sale of debts without recourse Any bad debts are suffered by factor Treat cash received from factor as settlement of debts Provisions Contingencies Provisions Affect income statement balance sheet Contingencies No affect Can be disclosed as note May not even be disclosed at all Provisions Liability of uncertain timing or amount Increase in provision recognised in IS as expense Liability created Provisions are by nature uncertain so Timing and amount has to be estimated Recognition Used to be able to use provisions to manipulate accounts Eg loss making business creating provision to cause large loss in 1 year Gradually reduce provision in subsequent years to offset losses/show profits IAS 37 prevents this Company should have present obligation arising from past event Must be probable an outflow of resources embodying economic benefits will be required to clea